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HSBC Survives U.S. Investigations

hsbc-logo-squareHSBC (NYSE:$HBC), the biggest Asia-focused European bank, has agreed to pay a record $1.921 billion fine to settle the U.S. money laundering probe being conducted by the U.S. Department of Justice and other regulators, the biggest ever by any bank. Earlier in June, ING Bank (NYSE:$ING) was penalized $619 million for similar crimes for dealing with Cuba and Iran. HSBC was allegedly involved with Mexican drug cartels and Saudi terrorist organizations. More recently, after HSBC, another British bank Standard Chartered Plc was also slapped a fine of $327 million by U.S. regulators over its dealings with Iranian clients in violation of U.S. sanctions. This is in addition to the fines imposed earlier and has taken the total tally to $667 million.

HSBC has issued a statement of apology and admitted to lapses in its internal-controller procedures. The Bank’s chief Stuart Gulliver’s statement read “We accept responsibility for our past mistakes. We have said we are profoundly sorry for them, and we do so again. The HSBC of today is a fundamentally different organization from the one that made those mistakes,”

Another settlement is also expected with U.K’s Financial Services Authority. This would be the third time in ten years that the bank has been fined for lack of controls. Following the current settlement, there is not going to be any further prosecution from the U.S regulators.

A little more than a month ago, HSBC informed its investors that it was keeping another $800 million aside, in addition to $700 million announced in July, to cover for the anticipated fine which was likely to be more than $1.5 billion. The bank was also expecting a deferred prosecution agreement, not a formal indictment. Gulliver was right as this is exactly what happened.

However, despite the enormity of the fine, according to the research firm Quartz, it will take HSBC just a little over a month to earn back the value of it. $1.9 billion is merely 22.7% of its H1-2012 income of $8.43 billion, 0.07% of its $2.6 trillion in total assets, less than 1% of its $198 billion market cap and 0.21% of its $932.44 billion in total cash. The point being is that this is another example of a “Too Big to Fail” bank being held liable for criminal activity.  Moreover, the penalty dwarfs the $7 billion in cash deposits in 2007-08 related to Mexican drug cartels, $15 billion accepted from high risk clients and $19.7 billion questionable cash deposits related to Burma, Cuba, North Korea, Sudan and Iran from 2001 till 2007.

So far, HSBC, Standard Chartered and ING have secured the first, second and third spot for record fines, all being imposed in 2012. The fifth, sixth and ninth spots are secured by Barclays (NYSE:$BCS). In August 2010, Barclays was fined $298 million for transacting with several countries that were under U.S. sanctions radar. Then in June 2012, the bank was fined $450 million over Libor manipulation and three months later, was slapped with another $470 million for rigging the California electricity market. In the three instances, Barclays has paid a total of $1.21 billion. Of course, Barclays had more than $745 billion of cash reserves by the end of 2011.






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*Standard Chartered Plc

The news of the fines also did not have any significant negative impact on the stocks of these banks as the fine itself was priced in and the market knows that U.S. regulators are captured by the banks they are supposed to be policing.  The record $25 billion settlement that U.S. banks like Bank of America (NYSE:$BAC) and others agreed to was less than 1% of the actual fraud involved and because of it the foreclosure process is no longer clogged up while centuries-old contract and property law were trampled on.

In fact, since mid-July, when the news of HSBC’s money laundering first broke out, the bank’s shares have been up more than 18% at both NYSE and Hong Kong, because now that the situation has been resolved business can be return to normal.   Overall, since January, only Standard Chartered’s stock at London has been behind SPDR S&P 500 ETF (AMEX:$SPY) but the other three banks at New York, HSBC, Barclays and ING are well ahead of the S&P 500.   The bottom line is that politics will not upset the apple cart.  These fines and abuses will be made large enough to grab a headline and alleviate a bit of the budget deficit but will do little to alter the investment thesis for the bank. 

Politically, these headlines are designed to demonize London banks and shuffling the abuses of U.S. banks to the background.  HSBC is better positioned in Asia its London or U.S. peers.  Part of the capital re-alignment story is everyone going back to their respective corners.  The net effect of these fines and investigations is to send foreign banks home and transfer their business to the major U.S. banks.  Now that a great deal of these problems is behind HSBC it may be time to look at adding them on the strength of their Asian exposure and the lack of coordinated presence of the U.S. banks in the major emerging markets.

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Peter Pham is an author, international fund manager, and a registered financial director by the Cayman Monetary Authority (CIMA). In 2013 he published his first book entitled, The Big Trade: Simple Strategies for Maximum Market Returns. He currently manages the portfolio of a global hedge fund and runs an asset management company, Phoenix Capital.  (read more)

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